Wednesday, February 24, 2010

Market Update 2/24/10

The VIX term structure steepened as markets rebounded after Bernanke's speech.

Over the past 2 weeks VIX and VIX futures came down significantly. VIX call options lost value over this time period.
For example the 25 March VIX call options were trading at $3 on Feb 8. Today they closed at $0.6.
Here are the factors driving the price change:
-the March VIX futures went down from 26.2 to 21.7 today. This caused a loss of $2.3 in the price of the VIX call options
-options loose value over time, this option lost about $0.6 over this time period
-the option gained about $0.5 due to the increase in the implied volatility (from 73% to 88%). This is something unique to VIX options as I mentioned in my prior post, the IV goes up as they get closer to expiration. It is interesting how this reduces the cost of carry (theta) of these options.

If you add these up you get to the price difference of $2.4.

In case you were shorting this monster you are a happy guy.

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